Asia gets back in the game

Vaccination roll-outs started slowly but will soon allow domestic demand to rebound

6 July 2021 Frederic Neumann, Co-Head of Asian Economics Research

The pandemic still has Asia in its grip with cases in many countries at record levels. Where the virus remained well contained, local demand has to improve, but elsewhere, surging infections have halted activity. Vaccination roll-outs have been too slow to allow full relaxation of containment measures, especially cross-border travel, but vaccine deliveries should now accelerate sharply.

Singapore, South Korea and, possibly, Japan might reach herd immunity this year but most other countries won’t have 70 per cent vaccination until the first half of 2022.

And while we expect a significant improvement in local demand activity, particularly consumer spending, as infection rates fall, mainland China’s recovery has been a decidedly uneven. Investment, from real estate to infrastructure to manufacturing investment, has surged, but Chinese consumers remain much more cautious.

Unlike many developed markets, Asia’s emerging economies had only limited government transfers to households. The consumer recovery in ASEAN countries and South Asia is thus likely to prove more gradual after an initial bounce.

Further, job prospects remain weak. Manufacturing strength has been in sectors that aren’t labour intensive, notably semiconductors. Chinese employers are cutting payrolls, despite record exports – though Australian employment is now above pre-pandemic levels and labour-market shortages rising.

Exports have been a bright spot for many Asian economies but supply chains are stretched to breaking point, transportation has been severely disrupted, and shelves are empty.

Yet if consumer spending recovers only gradually and export growth cannot be sustained what will drive Asia’s growth? One notable feature of mainland China’s recovery has been a surge in manufacturing investment and this boom should persist for some time, spurring capital expenditure in a region that was under-invested before the pandemic.

Mainland China was first in and first out of major lockdowns. We forecast 8.5 per cent GDP growth this year and 5.6 per cent in 2022. Government curbs on the soaring property market should rotate investment from construction to capital spending and reduce pressures on commodity prices. But while rising producer prices pose risks across the region, the pick-up in consumer inflation should prove mostly transitory.

And if inflation targets aren’t exceeded, interest rates can be kept on hold. We expect only South Korea to raise rates this year with just a handful of central banks following over the second half of 2022. Quantitative easing and other policies will be unwound first – and only gradually.

Meanwhile Taiwan is riding the wave of global semiconductor demand. We see growth reaching 6 per cent this year, falling to 2.6 per cent in 2022. We forecast 6.5 per cent growth for Hong Kong’s as it recovers from last year’s slump, but travel is still restricted.

Expectations for Japan’s growth – 2.5 per cent this year, 1.3 per cent next - have been hit by a resurgence in the virus. South Korea is faring much better, with 2021 GDP forecast to rise 3.9 per cent after last year’s comparatively small contraction. And Australia is recovering well, with 5.1 per cent growth expected this year and 2.8 per cent in 2022: it contained infection levels well and provided generous fiscal stimulus.

However, India has succumbed to a ferocious outbreak and we have cut our growth forecast from 11 per cent to 8 per cent this year before 6 per cent expansion next year.

First published 29th June 2021.

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